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The average dividend yield for stocks in the Standard & Poor's 500 index is 1.65 percent.

Since 1950, the average yield has been 3.57 percent. Today's yield is way below the long-run average, but it's more than triple the current average 0.5 percent yield on money market funds.

Forty-five companies in the S&P 500 yield 4 percent or more. That's equal to or better than the current 4 percent yield on 10-year Treasury notes.

After taxes, a 4 percent stock yield beats a 4 percent bond yield, thanks to the new tax cut.

Starting this year, corporate stock dividends will be taxed at 15 percent for people in the upper tax brackets and 5 percent for people in the two lowest federal tax brackets. In the past, dividends were taxed as ordinary income.

Meanwhile interest from Treasury bonds, money market funds and CDs will continue to be taxed as ordinary income, at rates up to 35 percent.

Of course, stocks are no substitute for money funds, bonds and other fixed- income investments. Stock prices are more volatile, and people who can't afford to lose principal should avoid them.

But if you need income, can stomach some risk and have at least a five-year horizon, dividend-paying stocks may be a good option.

JUICIEST YIELDS

There are two basic ways to invest in dividend stocks.

If your priority is getting the highest current income, look for the highest-yielding stocks.

The chart shows the highest-yielding stocks in the S&P 500.

Most stocks with fat yields fall into one of three categories, each with its own downside:

-- Stocks that have tumbled in price because the company has run into trouble. The downside: If the problems continue, the company might reduce or eliminate the dividend.

R.J. Reynolds and Altria (formerly Philip Morris) are cash cows that pay big dividends, but the dividends could be in jeopardy if the companies lose tobacco lawsuits or people kick the habit. They are also facing competition from generics.

-- Real estate investment trusts. Unlike regular corporations, REITs pay little or no taxes at the corporate level. As a result, REITs were largely exempted from the dividend-tax cut.

The downside: Investors will pay ordinary income taxes on most REIT dividends. Some REIT dividends are so big, however, that even on an after-tax basis, they yield more than corporate stocks.

-- Slow-growing companies that pay most of their profits in dividends, rather than reinvesting them in the company. Many of these are traditional electric and gas utilities such as Duke Energy, Ameren and Consolidated Edison.

The downside: These companies aren't growing much, so most of your return will come from dividends rather than an increase in the stock price. That's not necessarily bad if you need income and don't plan to sell the stock, but make sure the company's earnings can comfortably cover the dividend.

DIVIDEND-GROWTH STRATEGY

The other approach is to buy stocks that are likely to increase their dividend even if they're not paying much today.

Joseph Lisanti, editor of the S&P Outlook, uses Bank of America as an example.

Suppose you had bought BofA 10 years ago at $25 per share. Since then, it has increased its annual dividend from 80 cents to the equivalent of $3.20 per year.

On its current stock price, $83.15, it's yielding 3.8 percent.

But you paid only $25 per share, so the yield on your cost basis is 12.8 percent.

To find companies likely to boost their dividend, look at ones that have done so in the past.

Fifty-five companies in the S&P 500 have increased their cash dividends every year for at least 25 years. S&P calls these "dividend aristocrats." (See chart.)

yielding 0.8 percent. The consumer products company is paying out only 16 percent of its earnings. "It could be paying out twice its current dividend," he says.

He also likes Pfizer, which is yielding 1.8 percent but paying out only 33 percent of its earnings. Another favorite is Hillenbrand Industries, which makes caskets and hospital beds. It's yielding 2 percent and has increased its dividend every year for 32 years.

MUTUAL FUNDS

If you don't want to pick individual stocks, you can buy mutual funds that emphasize dividends. Again, there are two basic types.

Both invest in common stocks that pay dividends, but equity-income funds are more interested in income than growth. Growth and income funds are more interested in growth than income.

Equity-income funds generally provide higher current yields, while growth- and-income funds might do better over the long term.

About a dozen companies offer funds with "dividend" in the name. These are usually in the growth-and-income genre. Look for more as fund companies seek to capitalize on the dividend tax break.

If a fund earns common-stock dividends that qualify for the new lower rate and distributes them to shareholders, shareholders also get the tax break.

Some funds that emphasize yield -- such as balanced funds -- buy bonds and preferred stocks in addition to common stocks. But income from bonds and most preferred stocks won't qualify for the lower dividend tax, and neither will that portion of a mutual fund's income distribution.

Funds have to start telling investors how much of their income distribution gets the lower tax rate and how much does not.

The downside of buying a fund is that managers charge an annual fee -- about 1.5 percent on average for stock -- to cover their expenses.

Most managers take their fee out of the dividends and other income the fund earns on its investments. If the fund earns only 1.5 percent a year in dividends and charges 1.5 percent in expenses, shareholders get no dividends and no benefit from the tax cut.

Figuring out how much a fund yields can be tricky.

Some funds might tell you the gross yield they earn on their investments before the funds' fees are deducted.

Some may give you the SEC yield, which is essentially the yield for the past month, extrapolated over a year. This may not give you an accurate picture of the fund's annual yield.

To compare funds using a common yardstick, go to www.morningstar.com. Type in the fund's name or ticker symbol. The first page that comes up for each fund shows "Yield % (TTM)."

This is the total income (including dividends) distributed to shareholders over the past 12 months divided by the fund's share price at the end of the most recent month.

The resulting number tells you how much the fund yielded in the past, but not how much it will yield in the future.

A final warning on the new dividend tax: To get the lower rate, you must own a stock or mutual fund for at least 60 days in the 120 days before or after the ex-dividend date.

GLANCY UPDATE

David Glancy, manager of the Fidelity Leveraged Company Stock Fund, whom I wrote about July 6, is leaving Fidelity to start a hedge fund. Although Fidelity has a deep bench, this fund was started mainly to capitalize on Glancy's experience running Fidelity Capital & Income, a junk-bond fund. Current or prospective shareholders of both funds should proceed with caution.